Definition and Types of Accounts Receivable

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The word "receivable" is certainly not a foreign language in bookkeeping or accounting dictionaries. This phrase is usually used on a company's balance sheet or cash flow.

In running a business, there are various terms used in connection with corporate finance. This includes things such as accounts receivable that must be paid and money that will be received.

To become a successful businessman, you must be familiar with the terms of the financial world. This is very relevant for those of you who work in accounting or bookkeeping.

Understanding these words can help you run your company efficiently. Basically, receivables are claims made to third parties in the form of money, products, or services.

When you sell goods on credit to consumers, you don't get all the payments right away. This is called debt.

To find out more about the definition of accounts receivable, categories of receivables, and their derivatives, see the explanation below, OK!

Definition of Accounts Receivable

According to Investopedia, receivables effort is a cash balance that arises when a company offers a product or service but has not been paid by the customer. Trade receivables are part of the company's balance sheet and are recorded as current assets.

Definition of Accounts Receivable

Money that customers owe you for credit purchases is known as receivables. “Trade receivables” refers to bills owed by companies. That is, the company has the right to get a certain amount of money from the sale of a product or service.

Accounts receivable is a kind of credit sale, which includes various conditions, such as very short payment due dates. Because customers have an obligation to pay, trade receivables are treated as assets.

Why Do Companies Have Accounts Receivable?

In today's competitive market, companies need to offer products and services on credit to make payment procedures more flexible and simple for customers.

Customers are more likely to buy products and services on credit because they prefer to save their cash and are less likely to spend it on credit.

For example, suppose your vendor wants to buy goods from you to sell to their customers because they have received a sales order but do not have the money to pay for the goods.

It is possible for them to make a credit purchase from you and send it to their client's warehouse. Once your supplier receives money from their customer, they will pay you and delete the invoice.

Electric utility companies are another example. The money is provided on credit by the electric company, which bills the customer at the end of each month. All outstanding debts from all customers are part of their receivables.

Purpose of Accounts Receivable

Selling goods on credit is critical to a company's success. because not all buyers have the money to buy all their daily needs in cash.

Customers are more likely to return if you give them the option to pay for their purchases later. not a few buyers who have enough money but prefer credit.

Purpose of Accounts Receivable

Because, often, buying on credit allows the buyer to spend some of the money for other purposes. In most cases, payment is due within a few months.

As a result, allowing customers to buy goods on credit can increase sales and keep them loyal.

Benefits of Accounts Receivable for Companies

According to Chron, there are several benefits of accounts receivable for companies. Trade receivables are credit given to customers, the benefits of trade receivables are:

  1. Generate income, because the source of income is basically in the form of cash and credit. Getting cash up front is profitable, but accounts receivable can drive more sales. Buyers can make transactions even if they don't have enough money.
  2. Trade receivables are the largest current asset for the company. Current assets mature within 12 months, meaning that companies that sell goods on credit are tantamount to investing in the future. Because, usually credit sales of goods have interest. The difference between the interest and the original price is another advantage for the company.

Receivables are current assets, so they can be used to measure a company's liquidity or capacity to pay off its commitments.

Types of Accounts Receivable

Accounts receivable, once you've studied what those terms mean and what they can do for your receivables, should be broken down into categories.

What are the forms of receivables? Here's how it works.

Types of Accounts Receivable

accounts receivable

Receivables generally develop due to sales on credit. In this case, the balance of accounts receivable is the amount of income that will be received by the seller in accordance with the sale and purchase agreement.

In most cases, the payback period is for credit card only a few months.

Notes Receivable

Trade receivables are similar to ordinary receivables, but the loan terms and interest rates are different.

A promissory note is used to secure these receivables, which are usually returned within two to three months. No interest is charged, unless the borrower requests an extension.

Other Receivables

Receivables of this kind are quite broad, as they can include interest receivables, wages receivables, employee advances, and taxes. Receivables of this kind are usually stated individually on a company's balance sheet. In addition, there is always a risk that the borrower or debtor cannot repay the loan. A tax break for corporations may be available if the debt is written off.

How to Increase Accounts Receivable

An increase in receivables requires a number of considerations before trying to provide credit alternatives to customers.

Summarized from the Live Plan, see the following explanation!

Offer Discounts

To increase receivables, you can provide discounts on your goods. Customers paying by credit card, for example, will get a discount.

Apart from that, you can also give a discount if the buyer pays off the bill early. You might also think about extending uncredited credit from time to time. You can increase your receivables by using this strategy.

Imposing Fines

If the borrower fails to make payments on time, you may charge a fee to protect your current assets. When negotiating the terms of the sale and purchase agreement, you and the buyer can agree on the amount of the fine up front. Your debt may be repaid with a fine.

Receivable Financing

If you are afraid that customers will not be able to pay off their obligations on time, you can do debt financing. When you're ready, you can send an invoice for the purchase of accounts receivable to the finance company.

You will be paid 80-90 percent of the bill amount in cash. Next, the buyer will pay the loan to the finance company, and you will receive the rest.

Take Advantage of Receivable Platforms

Working with a credit collection company or platform is a better option than doing the billing process yourself.

You will save yourself the trouble of having to catch up on unpaid debts this way. Because this platform will remind your customers to complete their obligations.

Take advantage of Platforms

Characteristics of Accounts Receivable

The following are the characteristics of receivables:

There is a Maturity Value

When a customer purchases something on credit, he is responsible for the purchase price of the item and any interest accrued during the period the customer asked him to pay it.

The maturity value is the total principal transaction value combined with the interest rate charged to be paid on the maturity date.

There is a Due Date

The maturity date can be calculated from the length or age of the receivables. Generally, traders use two types of age metrics, namely months and days.

The maturity date is the same as the day the buyer starts the credit transaction if you use a monthly calculation. It's just a different month. If it is based on a daily basis, calculations are needed to ensure the correct due date.

Existence of Applicable Interest

When the customer agrees to pay by credit, accounts receivable is the result. This raises many questions.

In this case, interest is paid because the buyer requests a certain payment period and the seller is willing to wait for credit payments.

The interest rate applied in this example is set at the seller's discretion.

FAQs

Below we have summarized some frequently asked questions about receivables, as follows:

When Do Receivables Occur?

Receivables can occur because the buyer decides to make a credit transaction. This will generate interest. Interest in this case is paid as a consequence of the buyer asking for a certain payment time and as an advantage for sales because they have been patient in waiting for the credit to be repaid.

Conclusion

Trade receivables are claims made to third parties in the form of money, products or services. That is, the company has the right to get a certain amount of money from the sale of a product or service.

Trade receivables are loans made to customers. Selling on credit is worth investing in the future because, generally speaking, selling goods on credit requires interest. Companies also benefit from the difference in interest to the original price.

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